PBGC Says Pension Promises Outpace Funding

The problem is more than just the decline in asset
values, and the application of now defunct 30-year Treasury
bond rate, Pension Benefit Guaranty Corporation (PBGC)
Assistant Executive Director Vince A. Snowbarger, told
attendees at the annual American Society of Pension
Actuaries Conference (ASPA) in
Washington, D.C.
“The funding is not keeping pace with the promises,”
he said.

The agency has picked up the responsibility for about
120 plans over the past year, including Bethlehem Steel,
LTV, and National Steel – which were only funded at levels
of 48%, 50%, and 54%, according to PBGC
calculations.
Snowbarger noted that more than half (56%) of the
claims absorbed by the agency since its inception in 1975
have been steel companies, although those programs
represent just 3% of participants covered.
Airline plans, another large claims category, represent 17%
of the agencies claims since inception, but less than 2% of
the participants (see
Steel, Airlines Weigh on PBGC
)
.

Junk “Funk”

It’s not as though the companies with problem
pensions are invisible.
Snowbarger said 27 of the largest claims in the
agency’s history had below investment grade debt ratings
for over a decade before the PBGC stepped in – a decade
during which they continued to make increasing pension
commitments, according to Snowbarger.
“Just because you’re in junk bond status doesn’t mean you
can’t keep promising things,” he said.

Those promises have a cost, but global economic
pressures have impacted companies’ ability to absorb
them.
“Once upon a time you could imbed the costs of these
promises in the cost of goods sold, but no more,” he said.
The nation’s defined benefit system is currently
underfunded by about $350 billion, according to Snowbarger,
who said that about $80 billion of that total has been
classified as a “reasonably possible” claim by the agency.
“Times have changed, but we’re not sure plan sponsors have
changed with the times,” he said.

Snowbarger shared a number of charts that highlighted
a dramatic reduction in contributions made to pension plans
over the past 20 years.
While in the early 1980s some $70 billion was
contributed, contribution levels fell to just $26 billion
on average, from 1995 to 1999.
“The market was paying for the system,” he noted.

Since the beginning of the decade, real equity
returns have been a negative 10.9%, according to
Snowbarger.
Based on estimates of a PBGC actuary, Snowbarger
said that you would need an average return of more than 23%
every year for the next seven years of the decade to
average double digit returns for the decade.
Of course, most pension plans are not 100% invested in
equities, nor are most funding calculations predicated on
double digit returns.

Improve the accuracy of the pension liability
discount rate (to one that would take into account
the age/dynamics of the specific plan, not a "one
size fits all" approach where all plans use the same
rate)

Increase transparency of pension plan information
- including more information to participants, and more
information to the investing public about these
commitments

Strengthen safeguards against underfunding

Comprehensive funding reforms.

In response to audience questions, Snowbarger said
that the agency is considering risk based premiums, but
cautioned that the PBGC's preference was to get more money
into the system, not into the PBGC coffers.
"Our major concern is underfunding…if you don't fix
that, legislation is not likely to increase the premiums
enough to deal with the problem," he said.
And, he noted, companies most likely to be subjected to
those type premiums would be least able to afford them -
even if the premiums could be made large enough to deal
with the problem.

Snowbarger said that the PBGC was looking at the
possibility of raising funding targets so that employers
could contribute more during good times.
Acknowledging concerns that the Administration's
yield curve alternative to the 30-year Treasury bond rate
might make things more volatile, he noted, "I don't know
how the system could be more volatile."